What is a market economy?
Resources are allocated among households and firms with little or no government interference
How do producers earn a living?
By selling the products that consumers want.
What is a competitive market?
Exists when there are so many buyers and sellers that each has only a small impact on the market price and output.
What is an imperfect market?
One in which either the buyer or the seller has an influence on the market price.
What is a monopoly?
Exists when a single company supplies the entire market for a particular good or serbice
What is the Law of Demand?
An inverse relationship between price and quantity demanded. Quantity demanded falls when prices rise and it rises when prices fall.
What is market demand?
The sum of all the individual quantities demanded by each buyer in the market at each price.
What does a price change cause in regards to the demand curve?
A price change causes movement ALONG a given demand curve, but it cannot cause a shift in the demand curve.
What variables can shift demand?
- Taste and preferences.
- Changes in buyer’s income
- Price of related goods
- Expectations regarding the future price
- Number of buyers
What happens when a consumer has a change in income?
- Consumers buy more of a normal good when their income rises.
- Consumers buy more of an inferior good as income falls (out of necessity).
What are Complementary Goods?
Two goods that are used together.
-when the price of a complementary good rises, demand for a related good decreases.
When can shifts in demand happen?
When an outside event influences human behavior.
What is quantity supplied?
The amount of a good or service that producers are willing and able to sell at the current price.
What is the Law of Supply?
All other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price of the good falls.
What is market supply?
The sum of the quantities supplied by each seller in the market at each price.
What does not cause a shift in supply?
Price! A price change causes movement along the supply curve, not a shift in the supply curve.
What factors can shift the supply curve?
- Cost of inputs
- Changes in technology
- Changes in the production process (e.g. more/less efficient)
- Taxes
- Subsidies
What are inputs?
Resources used in the production process
What are examples of inputs?
- Workers
- Equipment
- Raw Material
- Buildings
- Capital
When does equilibrium occur?
The point where the demand curve and the supply curve intersect.
What is the equilibrium price?
The price at which the quantity supplied is equal to the quantity demanded. This is also known as the market-clearing price.
What is the Law of Supply and Demand?
The amount at which the quantity supplied is equal to the quantity demanded.
When does a shortage occur?
Whenever the quantity supplied is less than the quantity demanded.
When does a surplus occur?
Whenever the quantity supplied is greater than the quantity demanded.
